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Ownership Transition in the Canadian Wine Industry

16/12/2014


This article originally appeared in the Spring issue of Canadian Grapes to Wine and has been reproduced with permission.​

Some ideas to sip on…

There is a seismic shift underway in Canada. The ownership of small and medium size private businesses is changing hands at a rate never before seen.

In his 2012 brief, CIBC analyst Benjamin Tal crunched some data from Statistics Canada and highlighted some attention-getting points:

  • By 2020, close to 350,000 Canadian business owners will be over the age of 55;
  • Within the next 10 years (now 8 years), close to half (or 550,000) business owners will exit their business;
  • B.C. has by far the highest rate of transition among the provinces, with over 40% of businesses expected to change hands in the next 5 (now 3) years;

SOURCE: Inadequate Business Succession Planning – A Growing Macroeconomic Risk

Benjamin Tal (CIBC) 2012

The Canadian wine industry is not immune to this avalanche of business transition. In fact, I believe that because owning and operating an estate winery in Canada is such a costly venture, smaller winery owners are more likely to be closer to full retirement age than most other industries. There seems to be a common trend to start a winery business at a later stage in life, as sort of a bridge to full retirement. Often, owners have accumulated the wealth necessary to start an estate winery through other businesses or careers. Starting up a winery business requires lots of money (land, infrastructure, equipment, etc., etc.) and as a result people tend to enter the industry somewhat later in life.

When you think about it, there are really only three options for the succession of a privately held business:

  1. Transition the ownership and operation of the business within the family;
  2. Sale of the business to an unrelated purchaser; or
  3. Close down the business and sell off what you can

The wine industry in Canada is still very young. In almost all cases, the winery owners now considering retirement and transition are the ones that founded their businesses. Keeping the business in the family may be the most desirable option, but it is often the most difficult to pull off successfully. It’s commonly held that only about a third of all small to medium-sized family businesses in Canada are able to successfully transition to the next family generation.

For now, let’s focus on options 2 and 3, which both involve marketing your winery business, or parts of it, to an unrelated party. There are certain characteristics of a Canadian estate winery that make it particularly unique from other types of businesses. Understanding these characteristics can help you to view your winery through the eyes of a potential purchaser in order to better appreciate what may influence a future sale.

Estate winery businesses are a very unique blend of farming, manufacturing, retail & wholesale businesses, all rolled up in to one package

Certain parts of your overall business may be better developed than others. For instance, your vineyard may be renowned for producing premium grapes, but your brand may be new and under developed. Or you may have a great location and tasting room but have not yet been able to expand your sales by developing your wholesale channels. Understanding which aspects of your overall business are strong will help you understand the type of purchaser that may be interested.

The value of your package may be primarily in the real estate, your brand, or if you are lucky, both

Owning a lot of valuable vineyard property may be a bonus or a deterrent, depending upon the purchaser. Imagine you are shopping for a house and you find the perfect fit – just the right size and number of bedrooms and a great floor plan. But the house of your dreams may be built on a large lot with a swimming pool which drives the price up beyond your budget.

This scenario can be especially true for wineries - a purchaser may have deep pockets and be looking for large vineyards with established history, or they may have much tighter resources and having the land packaged in with the winery and brand takes them out of the running. Depending on the situation, you may be required to sell a portion of your vineyard holdings to a separate buyer, or you may have to retain a vineyard and lease it back to the party that purchases the winery. There are many ways to get a deal done if you can remain flexible.

For many smaller estate wineries, a sale is essentially a real estate driven transaction. Think of your estate winery as a bundle of assets. There is the vineyard, vineyard equipment, production equipment and facilities, barrels and tanks, bulk and bottled wine inventory and your tasting room. Your property may also have extra assets like additional land and residential houses. Most of the time, you will be selling some or all of these assets at their appraised fair market values. Occasionally, a purchaser will be willing to pay a premium – a price higher than the sum of the values of the other assets. We call this premium goodwill, but in the wine industry we often call it the value of your brand.

Goodwill is usually evidenced by strong positive operating cash flows which the business has demonstrated it can maintain and grow over time. Building a brand takes time and in the wine business it usually requires the development of several strong sales channels, beyond the counter sales at your wine shop.

Compared to most other businesses, estate wineries are tied to a unique geographical location – terroir is not portable;

With the youthful age of the Canadian wine industry and the explosion of new entrants in the past decade, most business observers would figure the industry is ripe for some consolidation. While there has been lots of speculation, and even a couple of transactions, there has not been the level of activity most expected. I think this is because investors are still trying to figure out a consolidation model that takes in to account the most important factor in making great wine – terroir.

As the baby boom reaches retirement, many Canadian industries are seeing great change as large numbers of small businesses are snapped up by larger competitors who can buy locations cheaply and roll them in to a much larger organization in order to expand service offerings and take advantage of economies of scale. The challenge in the wine industry is that brand and the character of wine is inextricably linked to a specific place. As a consolidator, if I want your brand I likely need to buy (or lease) your vineyard. There are opportunities to consolidate the administration, marketing and production aspects of several wineries but at the end of the day it’s the land that produces the unique grapes and the grapes that make the wine.

Over the next few years, dozens of Canadian wineries will change hands. Understanding what makes the Canadian wine industry generally, and your winery specifically unique can help you understand what type of buyer you are looking. And understanding their motivation may just help you earn top dollar for your hard earned investment.

For more information, contact Geoff McIntyre, CPA, CA, at 250.979.2574 or [email protected].